GST

Goods and Services Tax: The Introduction Process

G. Raghuram

K.S. Deepa

W.P. No.2015-03-01 March 2015

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W.P. No. 2015-03-01 Page No. 2

Goods and Services Tax: The Introduction Process

G. Raghuram

Professor

Indian Institute of Management, Ahmedabad

Email: [email protected]

K.S. Deepa

Graduate Student, Master of Public Policy

National Law School of India University

Bangalore

Email: [email protected]

Abstract

This paper focuses on the process of introducing the Goods and Services Tax (GST), bringing

out the perspectives of different stakeholders and the contentious issues. The GST was expected

to subsume a variety of taxes and simplify the indirect tax regime. The Empowered Committee

(EC) was mandated in 2007, to bring about consensus among the States to move towards GST.

The important stakeholders in the process were the Government of India (GoI), individual States,

industry and the committees commissioned by the GoI or EC. However, the EC faced challenges

since there were issues of control between the Centre and States, perceived loss of revenue by

some States, extent of uniformity across various commodities and their tax rates, input credit

mechanism and dispute settlement. The deadline for the introduction of GST kept getting

postponed due to the slow resolution of the challenging issues. Finally, it was tabled in the

Parliament as the 122nd

Constitutional Amendment Bill (CAB) in December 2014.

Keywords: GST, Constitutional Amendment, Indirect Tax, Federalism

W.P. No. 2015-03-01 Page No. 3

Goods and Services Tax: The Introduction Process

On December 20, 2014, the Empowered Committee (EC) of the State Finance Ministers (FMs)

agreed to support the 122nd

Constitution Amendment Bill (CAB) if the States were adequately

compensated for the loss of revenue. On December 19, 2014, the 122nd

CAB was tabled in

Parliament for the introduction of Goods and Services Tax (GST) that allowed a parallel levy of

indirect taxes on the supply of goods or services or both by the Centre and State Governments

(including Union Territories). It introduced a dual taxation system subsuming the various

indirect taxes levied then (Exhibit 1). The 122nd

CAB was a culmination of the sustained efforts

of the EC, which had been working since its constitution on July 17, 2000 (Exhibit 2).

According to the 122nd

CAB,1 the term 'GST' was defined by introducing a clause 12A in Article

366 of the Constitution of India, to mean any tax on supply of goods or services or both except taxes on supply of the alcoholic liquor for human consumption. Services under the 122nd CAB means anything other than goods. State with reference to articles 246A, 268, 269, 269A and article 279A includes a Union territory with the Legislature.

Thus, all the supply of goods or services or both would attract Centre level Goods and Service

Tax (CGST; to be levied by the Centre) and State level Goods and Service Tax (SGST; to be

levied by State) unless kept out of the purview of GST. As GST would be applicable to 'supply',

the erstwhile taxable events such as 'manufacture', 'sale' and 'provision of services' would lose

their relevance. GST would enable a larger tax collection base and prevent cascading of taxes1.

The EC was formed on July 17, 2000 with FMs of seven states as its members with the objective

to monitor the smooth implementation of the then proposed Value Added Tax (VAT) across the

country. Later on, the reconstituted EC with FMs of all the States was registered as a society on

August 17, 2004 with Asim Dasgupta (then FM, West Bengal) as its Chairman.2

Indirect Taxation Reforms in India

Charges levied by the State on consumption, expenditure, privilege, or right, but not on income

or property are called Indirect Taxes (Exhibit 3). There was an effort to reform indirect taxes

with the formation of an Indirect Taxation Enquiry Committee (ITEC) in 1976 (Annexure 1).

The ITEC submitted its report in 1978. After a decade of submission of the report by ITEC, a

Long Term Fiscal Policy report (Annexure I) was presented along with the Union Budget of

1985-86 under VP Singh, the then Union FM. Accepting its recommendations, a Modified

Value Added Tax (MODVAT) was introduced on a few commodities on March 1, 1986. A Tax

Reforms Committee with Raja J Chelliah as its Chairman was formed on August 29, 1991. The

committee gave its recommendations to introduce VAT at the manufacturing level covering all

Written by G Raghuram and KS Deepa. The authors acknowledge the contributions made by Abhiruchi Kaul and Stuti Bansal. 1 The Constitution (One Hundred and Twenty Second) Amendment Bill 2014,

http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf, accessed on December 21, 2014 2 http://www.empcom.gov.in/content/6_1_AboutUs.aspx, accessed on December 22, 2014

W.P. No. 2015-03-01 Page No. 4

goods in December 1991. The recommendations were accepted and introduced partially by the

Government of India (GoI) in the Budget of 1993-94.3

On November 16, 1999, it was decided by Yashwant Sinha, the then Union FM in a meeting of

State Chief Ministers (CMs) to take steps for introduction of nationwide State level VAT in

order to avoid the cascading effect of taxes. MODVAT was renamed as Central level Value

Added Tax (CENVAT) wef April 1, 2000, which introduced new CENVAT Credit Rules. The

EC formed was to supervise the implementation of VAT and to monitor the phasing out of the

sales tax based incentive schemes. These Rules sought to introduce simplified CENVAT

provisions and procedures for allowing credit of duty paid on specified inputs and capital goods

used in or in relation to manufacture of specified final products. CENVAT Credit Rules were

introduced wef March 1, 2002. The new rules contained complete provisions for taking credit of

duty paid on inputs and capital goods.4 A Task Force on Indirect Taxes, formed in July 2002

under the chairmanship of Vijay Kelkar, Adviser to Minister of Finance and Company Affairs,

gave its view that VAT is a major reform in the indirect tax system of India.5 The EC had been working for the execution of State level VAT dealing with inside (State demands) and outside

(industry, exporters and other stakeholders) pressures.

Moving towards GST

A Task Force on the implementation of Fiscal Responsibility and Budget Management Act was

formed by the Central Government on February 18, 2004 under the chairmanship of Vijay

Kelkar in 2003. The report submitted to the Central Government on July 16, 2004, strongly

recommended the adoption of GST for the indirect taxation in India.6

The Kelkar Task Force report stated that India has been moving slowly but steadily towards

VAT since 1986 but the system still had many problems leading to a low tax GDP ratio (Exhibit

4). Giving solution to the problems, they suggested the introduction of CGST. The report said, the tax on services should be fully integrated with the existing CENVAT on goods by a modern VAT type levy on all goods and services to be imposed by the central government (CGST). The report also gave the features to be included in the design of CGST.

7

The concept of GST was introduced in the Parliament for the first time on February 28, 2006 by

P Chidambaram, the then Union FM in the Union Budget Speech of 2006-07. He remarked, It is my sense that there is a large consensus that the country should move towards a national level

GST that should be shared between the Centre and the States. I propose that we set April 1, 2010

as the date for introducing GST. The world over, goods and services attract the same rate of tax.

That is the foundation of a GST.8

3 Sury, M M (ed) (2006). Taxation in India 1925 to 2007: History, Policy, Trends and Outlook, Indian Tax foundation,

New Delhi 4 https://www.welingkaronline.org/DLP/FINANCE%20-%20CENVAT%20AND%20ITS%20IMPLICATIONS.pdf,

accessed on January 22, 2015 5 Sury, M M (ed) (2006). Taxation in India 1925 to 2007: History, Policy, Trends and Outlook, Indian Tax foundation,

New Delhi 6 http://www.caaa.in/Image/23ugsthb.pdf , accessed on January 22, 2015

7 Report of Task Force on Implementation of FRBM Act, 2003 dated July 16, 2004

8 http://indiabudget.nic.in/ub2006-07/bs/speecha.htm, accessed on Janurary 14, 2015

W.P. No. 2015-03-01 Page No. 5

In the budget speech of 2007-08, P Chidambaram reiterated, At my request, the EC of State FMs has agreed to work with the Central Government to prepare a roadmap for introducing a

national level GST wef April 1, 2010.9

After the announcement made by P Chidambaram, the EC decided to set up a Joint Working

Group on May 10, 2007, with Dr Parthasarthi Shome, the then Adviser to the Union FM and

Satish Chandra, the Member-Secretary of EC as Co-conveners, and the concerned Joint

Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries

of the States as its members.

This Joint Working Group, after intensive internal discussions as well as interaction with experts

and representatives of Chambers of Commerce and Industry, submitted its report10

to the EC on

November 19, 2007.

The objectives of this report were:

To study the various models of GST existing globally

To identify the possible alternative models for introduction of GST in India

To examine their various characteristics and assess their suitability in Indias fiscal federal context.

To identify the Central Taxes and State Taxes which possess properties to be appropriately subsumed under GST

To suggest a model for the base and rate structure of GST

To constitute sub working groups

This report was then discussed in detail at the meeting of EC held on November 28, 2007. On the

basis of this discussion and written observations of the States, certain modifications were made

and a final version of the views of EC at that stage was prepared.

In his 2008 budget speech, P Chidambaram announced the reduction of Central Sales Tax (CST)

from four percent to two percent. He also expressed the desire of GoI to introduce GST from

April 1, 2010.

The views of the EC prepared in November was sent to the GoI on April 30, 2008. In the

meantime, Manmohan Singh, the then Prime Minister (PM) took over as interim FM on

November 28, 2008 from P Chidambaram. The comments of the GoI were received on

December 12, 2008 and were duly considered by the EC on December 16, 2008.

However, the report was never made public. In the meantime, Parthasarthi Shome had quit his

post as advisor to the FM on January 11, 2008, after being passed over for the post of Union

Revenue Secretary.

A Committee of Principal Secretaries/Secretaries (Finance/Taxation) and Commissioners of

Trade/Taxes of all States was set up to consider the comments of GoI and work out CGST and

SGST rates. They had detailed deliberations on January 5 and 6, 2009 and submitted their

recommendations to the EC. These were accepted by the EC on January 21, 2009.

On the same day, the EC also decided to constitute a Working Group consisting of Principal

Secretaries/Secretaries (Finance/Taxation), Commissioners of Trade/Taxes of all States and

9 Ibid.

10http://tinxsys.com/TinxsysInternetWeb/GSTJointWorkingGroup.pdf, accessed on January 22, 2015

W.P. No. 2015-03-01 Page No. 6

senior representatives of GoI to give their recommendations concerning three issues. They were

related to (i) commodities and services on the exempted list, (ii) rules and principles in taxing

services and (iii) finalising the model of interstate stock transfers of goods and services.

Pranab Mukherjee took over as Union FM from Manmohan Singh on January 24, 2009. The

Working Group met on February 10, 2009 and formed three sub working groups to study the

three issues.

Structure of GST

The Working Group submitted their detailed recommendations on the three issues which

provided a structure of GST. They submitted their report on November 11, 2009. The report

favoured a dual GST system. The dual system implied that tax was to be levied concurrently,

both at the Centre and at the State level called CGST and SGST respectively.

In the meantime, Sukumar Mukhopadhyay, former member of the Central Board of Excise and

Customs (CBEC) called the dual GST system as the best solution for a country like India in June

2009. A single GST system was also not agreed upon by the States, fearing revenue loss because

a single system of tax would be levied by GoI alone.

On June 29, 2009, Govinda Rao, then a member of Union FMs Economic Council had urged PM Manmohan Singh to delay the implementation of new tax rules till the Centre and the States

reached a consensus. The FM of Tamil Nadu, K Anbazhagan had also shared the same

viewpoint.

The new Union FM Pranab Mukherjee, while presenting the Budget on July 6, 2009 reiterated

that GST would come into effect from April 1, 2010.

A FICCI-Technopak report on Fast Moving Consumer Goods (FMCGs) was released in July

2009. This report suggested that the GoI needed to rapidly implement GST to replace the

multiple indirect taxes currently levied on FMCGs. This would lead to reduced prices and

increased tax collections.

In September 2009, the States reached a consensus on a two rate system as suggested by Asim

Dasgupta. This system implied a concessional rate for essential items and a standard rate for

other goods. The two rate system proposed by the states also had a special GST for precious

metals and a list of exempted items. In the same month, Asim Dasgupta also announced that a

Joint Working Group would be formed to decide the framework of the dual tax system and issues

relating to special rates. The committee was mandated to submit its report in two months time.

Chattisgarh, Haryana, Tamil Nadu, Rajasthan and Madhya Pradesh expressed their reservations

on the introduction of GST.

On October 17, 2009, Sushil K Modi, then Deputy CM of Bihar demanded adequate

compensation from the Centre. In his view, Bihar would lose Rs 600 cr since entry tax would get

merged with GST and another Rs 260 cr as service tax from the Centre would be subsumed

under GST. At that time, entry tax was imposed by the States and service tax was levied by the

Centre and distributed to the States. Following this, on October 26, 2009, Rajnath Singh,

President of BJP, opposed the GST regime stating that the trader organizations should also be

considered before bringing forward any new laws.

W.P. No. 2015-03-01 Page No. 7

Saurabh Patel, the then Minister of State for Finance and Industry, Gujarat, asked the Central

Government on November 2, 2009 for the protection of industries under GST administration. He

also wanted an open debate on GST and the list of exempted items.

First Discussion Paper

A First Discussion Paper (FDP) was released by the EC inviting interactions with industry, trade,

agriculture and common people on November 10, 2009. The FDP gave details of the structure of

the GST model to be introduced in India and an Annexure on frequently asked questions and

answers on GST. 11

This document also gave justification for adopting GST, stating that it would

improve the existing VAT. It also described the process of preparation of GST and a

comprehensive structure of the GST model.

Due to the ongoing talks related to shifting towards GST at that time, the States started asking

the Central Government for compensations up to five years in order to overcome the revenue

losses. It was feared that since some States were not big consumers of services, they would lose

revenue. Also, having a single rate all over would remove the autonomy that the States had

earlier to fix State tax rates.

On December 12, 2009, Asim Dasgupta announced that GST would have four slabs: a standard

rate for the majority of goods and services, a moderate rate for essential items, 1 percent rate for

precious metals and exempted items.

A Task Force on GST formed by the Thirteenth Finance Commission (FC) gave its report on

December 15, 2009. This report said, the discussions on the introduction of a comprehensive dual GST, both at the Centre and State level, have been in progress since early 2006. It is

unfortunate that no agreement on the GST has yet been reached even though the target date for

its introduction ie, 1st April, 2010, is less than six months. It also suggested pushing the date of implementation of GST to October 1, 2010.

12 The Task Force on GST was formed by the

Thirteenth FC in June 2008, with Arbind Modi, the then Joint Secretary, Department of Revenue

as its Chairman.

National Council of Applied Economic Research (NCAER) was asked by the Thirteenth FC to

prepare a report on the impact of GST on Indias growth and international trade. The study was done with Rajesh Chadha, Senior Fellow at NCAER as project leader. It was submitted in

December 2009.

Soon after that, on December 20, 2009, the PMs Economic Advisory Council Chairman, C Rangarajan said that he favoured a single slab each for goods and services or one common rate

for both, unlike the proposal mooted by the States. This was followed by the reports of the EC

stating that while the 13th

Financial Commission had recognised a single GST of 12 per cent, it

had decided to adopt a two rate structure.

A discussion of FMs of BJP ruled states on January 7, 2010 revealed their preference for

introducing GST in April 2011. The main concern raised at this meeting was that the GST rates

were not yet confirmed. The states also feared revenue loss and low compensation packages. On

January 13, 2010, Pranab Mukherjee met the state FMs as a pre budget exercise, to discuss the

issues of GST rates, compensation packages and modalities of implementation of GST. It was

11

First Discussion Paper on GST released on November 10, 2009, accessed on December 20, 2014 12

Report of Task Force on Goods & Services Tax, accessed on December 19, 2014

W.P. No. 2015-03-01 Page No. 8

confirmed at this meeting that the implementation of GST would be pushed to April 2011 as it

would take seven to eight months to pass the Constitutional amendments necessary to introduce

the GST bill.

On January 22, 2010 FC briefed the FM on its recommendations on sharing tax receipts between

the GoI and the states. This had a significant bearing on GST. It was proposed that the CST

would be subsumed in GST leading to a revenue loss to the states concerned.13

In the budget speech delivered on February 27, 2010 the FM revealed the GoIs intention to implement GST from April 2011. He also called for a Technology Advisory Group for Unique

Project (TAGUP) for an effective tax administration and financial governance system through the creation of IT projects that are secure and efficient (Exhibit 5).

On May 22, 2010, the GoI decided to introduce Direct Tax Code (DTC) to replace the Income

Tax Act, 1961 (Exhibit 6).

On June 8, 2010, the FM set up a seven member committee as TAGUP,14

headed by Nandan

Nilekani to recommend technical, regulatory and legal changes required to implement five

projects including GST. TAGUP was asked to submit its recommendations in a report within six

months to the FM.

In order to evolve a consensus with States on a single rate structure for GST, the FM met with

EC on July 21, 2010. He proposed a three tier tax structure in which a combined rate of 20%,

12% and 16% were to be charged respectively for goods, essential items and services. Out of

these rates, the States would receive rates of 10%, 6 % and 8 % respectively. Central indirect

taxes like excise duty and service tax, and state indirect taxes like VAT and octroi would be

subsumed in GST. The FM also considered stepping up the compensation package of the states

above the rates prescribed by the Thirteenth FC.

In the National Development Council (NDC) meet on July 25, 2010, the State CMs expressed

their reservations on the implementation of GST on account of lower compensation package and

loss of revenue of the states. The Gujarat CM Narendra Modi suggested that adequate IT

infrastructure should be in place before the implementation of GST. The Punjab CM Prakash

Singh Badal took strong objection to the absorption of purchase tax on agricultural crops under

the GST stating that states would lose revenue on a continuous basis.

Towards Constitutional Amendment

On August 4, 2010 the State CMs met for scrutinizing the CAB drafted by the Centre in order to

introduce the GST. To pass the bill with two thirds majority, 362 members of Lok Sabha and 161

members of the Rajya Sabha had to give assent to the draft bill (Exhibit 7).

The States rejected the draft bill based on two reasons.15

The draft bill provided for a GST

Council consisting of State FMs, the Union FM, and the Union Minister of State (MoS) for

Revenue to make recommendations with respect to GST. In matters where a consensus could not

be reached, the Union FM had a veto over the State FMs. The States opposed this provision.

13 CST is the tax that the GoI levies on goods that pass among states and distributes it to the states. 14

http://www.thehindu.com/news/national/finance-ministry-sets-up-technology-advisory-group/article449063.ece, accessed on January 31,2015 15

http://www.thehindu.com/todays-paper/tp-national/states-reject-gst-draft-bill-over-centres-veto-powers/article552468.ece, accessed on February 2, 2015

W.P. No. 2015-03-01 Page No. 9

The draft bill also empowered Parliament to establish a GST Dispute Settlement Authority

(GDSA), an executive body. This Authority would adjudicate disputes referred to it by a State or

GoI and the final appeal lay with the Supreme Court of India (SC). The States viewed this

provision as interference of the executive and the judiciary in legislative provenance.

After this meeting, the EC asked for a Second Discussion Paper. This move made it clear that the

draft bill could not be introduced in the monsoon session of the Parliament.

On August 9, 2010, GoI discussed the draft bill with BJP, the main opposition party. Following

this, on August 16, 2010, Pranab Mukherjee gave the BJP a revised draft bill removing the veto

power of the Union FM. The BJP convened a meeting of eight FMs of the NDA ruled states

(Karnataka, Madhya Pradesh, Gujarat, Chhattisgarh, Himachal Pradesh, Uttarakhand, Bihar and

Punjab) to build consensus over the draft bill.

At the meeting convened on August 18, 2010, no consensus was reached. The States decided to

individually present their views to the EC.

On August 31, 2010, Revenue Secretary Sunil Mitra announced that DTC would come into

effect from April 1, 2012. This would bring down the revenue for the Centre by Rs 53,172 cr. He

mentioned that this loss could be made up for, only with the simultaneous introduction of GST.

On September 13, 2010, the DTC bill was introduced in the Parliament.

On October 31, 2010, the Finance Ministry clarified that the demand of EC for altering the basic

structure of the GST including removing GST Council and GDSA was not acceptable. NDA

ruled States and Uttar Pradesh (UP) continued their opposition.

On February 5, 2011, Nandan Nilekani submitted the TAGUP report to the FM.16

TAGUP was

asked to make detailed recommendations regarding the technological architecture of five IT

intensive projects including GST. It was also asked to address and make recommendations

regarding human resources to co-ordinate projects among GoI, State and local governments and

between government and other organisations. The key recommendations of TAGUP were (i)

setting up National Information Utilities (NIU) to handle IT systems for five projects, including

GST and (ii) putting in place a Mission Execution Team with a dedicated mission leader to

coordinate projects between governments and other organisations.

On February 13, 2011, Pranab Mukherjee decided to call for a meeting with State FMs during

the recess17

of the budget. The purpose of this meet was to build a consensus over the third

version18

of the draft GST bill that was presented on January 28, 2011. The FM clarified that GoI

wanted to introduce the GST bill in the second half of the budget session, that was to take place

between April 4 and April 21, 2011. The third draft empowered the Parliament to set up a GST

council. The earlier drafts had endorsed the setting up of the GST council by a Presidential order.

16

http://www.thehindu.com/news/national/nilekani-submits-tagup-report-to-pranab/article1156635.ece, accessed on February 4, 2015 17

Recess of the budget is a month long interval between the first half of the budget session in which the budget is presented and the second half. Recess is used by PSCs to analyse ministry wise provisions given in the budget. 18

The first version of the draft bill was made by GoI in July 21, 2010. The second version on August 11, 2010, immediately followed the opposition of State CMs, in which the veto of the FM in GST Council was removed.

W.P. No. 2015-03-01 Page No. 10

On February 28, 2011, in his budget speech, Pranab Mukherjee announced that DTC would be

implemented from April 1, 2012. He expressed the desire of GoI to simultaneously implement

GST on the same day.

On March 22, 2011, Finance Bill 2011 was passed by the Lok Sabha (LS). In this bill, it was

revealed that National Securities Depository Ltd would be the technical partner for operating the

IT structure of the proposed GST.19

On the same day, the 115th

CAB, popularly called the GST

bill, was tabled in the Parliament by Pranab Mukherjee.20

On March 29, 2011, the bill was

referred to the Parliamentary Standing Committee (PSC) on Finance, headed by Yashwant Sinha,

to make a detailed examination (Exhibit 9).

On May 13, 2011, Asim Dasgupta lost assembly elections in West Bengal and stepped down as

the Chairman of the EC.

In response to a public notice inviting views on the 115th

CAB issued by the PSC, FICCI

submitted its response through a letter dated June 24, 2011.21

In its response, FICCI

recommended (i) the speedy implementation of IGST in lieu of CST, (ii) uniform rate of GST on

both goods and services, (iii) simple tax structure with minimal tax rates, (iv) uniform threshold

limit for goods and services both at the Central and State level and (v) a unified appellate and

adjudication authority for dispute settlement.

The PSC had two detailed sittings with the EC22

on June 8 and June 27, 2011, in which concerns

raised by the States regarding the 115th

CAB were discussed.

At the EC meeting on July 18, 2011, Sushil K Modi was unanimously elected as the new

chairman.23

The EC also decided to meet in mid August to discuss the compensation package to

be given to the States, due to the phasing out of the CST.

On August 4, 2011, Pranab Mukherjee met with Sushil K Modi to discuss how the EC would

deliberate on the issues related to GST. On the same day, Nandan Nilekani had a meeting with

Pranab Mukherjee on introducing a centralised IT infrastructure for GST.

The EC met on August 19, 2011, to discuss the IT infrastructure for GST, the compensation

package in lieu of CST and the 115th

CAB. Due to further delay in implementing GST, the States

concurred to extend the CST compensation package to the year 2010. In this meeting, the States

also raised their concerns about the loss of their fiscal autonomy and the powers of GDSA. They

wanted the GoI to empower them to levy a cess in case of natural calamity.

19

http://www.jsalaw.com/Admin/uplodedfiles/PublicationFiles/Budget%20news%20letter.pdf, accessed on

February 4, 2015 20

This refers to the third draft of the 115th

Constitutional Amendment Bill. 21

http://www.ficci.com/spdocument/20238/Towards-the-GST-Approach-Paper-Apri-2013.pdf, accessed on February 5, 2015 22

The first meeting was attended by Asim Dasgupta to represent the views of the EC during his chairmanship. The second meet was attended by Sushil K Modi, representing the concerns to be considered by EC in the coming months. 23

http://www.thehindu.com/news/states-to-look-for-new-chief-to-steer-gst/article2016033.ece, accessed on

February 5, 2015

W.P. No. 2015-03-01 Page No. 11

Compensation for the States

In response to the outcome of the EC meet, GoI asked the States to file for CST compensation

for the previous financial year of 2010-11.

In the next meet of the EC on October 14, 2011, three issues were discussed. The first issue was

about the unresolved taxation concerns of GoI and the States with respect to VAT. The States

mulled over the possibility of additional excise duty on textiles, tobacco and sugar. They also

considered imposing VAT on textiles and sugar. The States discussed their views on online

payment of taxes. The EC decided to come out with a report on its experience of its GST Team that recently visited Europe to study GST issues.

On January 10, 2012, the EC made four recommendations. The EC asked GoI (i) to remove the

upper limit of professional tax,24

(ii) to end centrally sponsored schemes and to provide funds directly to the States according to their needs and with suitable guidelines, (iii) to transfer health

and education funds to the Consolidated Fund of the States instead of districts, and (iv) to

empower the States to impose VAT on imports.

In the pre budget discussion with State FMs on January 19, 2012, Pranab Mukherjee assured the

States on their concerns raised during the previous EC meeting. He also discussed the issue of

improved and inclusive growth as the country was about to enter the 12th

Five Year Plan (FYP).

Pranab Mukherjee presented the Union budget on March 16, 2012. In his budget speech, he

alluded to the model legislation for the Centre and the States for CGST and SGST that was under

progress. Referring to the structure of GST Network (GSTN) approved by the EC, he said that

GSTN would be set up as a National Information Utility (NIU) by August 2012.25

On March 4, 2012, the EC asked for an adequate compensation package in lieu of CST. They put

out a negative list of 35 services to be kept out of the GST. It was decided that implementation of

GST would be postponed to April 1, 2013. On March 5, 2012, Pranab Mukherjee constituted a

PSC to look into the litigation of indirect taxes.

Subir Gokarn, the Deputy Governor of the Reserve Bank of India addressed the Confederation of

Indian Industries (CII) annual meet on March 30, 2012.26

In his address, he conjectured that the

proposed GST would create space for the interest rate to come down and contribute to growth.

He also said that GST would bring down inflation.

On March 30, 2012, the GoI set up a study team headed by MK Gupta, Vice Chairman of the

Central Excise and Customs Settlement Commission.27

The mandate of the study team was (i) to

evolve a common tax code, (ii) to look into the proposal to subsume service tax and Central

24

Professional Tax could be levied by the States under article 176 of the Constitution. Based on a 1988 amendment, the upper cap was set at Rs 2500. The States wanted this cap removed since professional remuneration had increased substantially in the intervening years. 25

The GSTN was a proposed system through which GST returns filing and payments processing for all States was based on a shared platform through registered PAN network. 26

http://www.thehindu.com/business/Economy/gst-will-help-contain-inflation/article3263158.ece, accessed on

February 6, 2015 27

http://www.thehindu.com/business/Economy/centre-sets-up-study-team-to-evolve-common-tax-

code/article3297428.ece, accessed on February 6, 2015

W.P. No. 2015-03-01 Page No. 12

excise duty under the GST, (iii) to simplify the input tax credit system and (iv) to make the

procedure of GST trade friendly. The study team was asked to weigh in the inputs from various

segments of the industry and submit a report to the FM by September 30, 2012.

In the second consultative meeting of the committee attached to his ministry, Pranab Mukherjee

outlined the benefits of the proposed GST to the Centre, State and the consumer, on May 23,

2012. He mentioned that the GST would (i) remove cascading effect of the indirect taxes at the

Centre, (ii) encourage the States to realise tax commensurate with consumption and (iii) make

the tax regime, transparent to the consumer and reduce the tax burden by 25-30 per cent.

On June 26, 2012, Pranab Mukherjee stepped down as Union FM, in order to file his

nominations as the Presidential candidate.28

PM Manmohan Singh assumed role of the interim

Union FM.

On July 1, 2012, the new service tax regime came into force.29

This was based on a uniform rate

of 12 per cent and a negative list of 28 activities.

Commerce and Industries Minister Anand Sharma in an interaction with the industry on July 15,

2012, mentioned that GST would attract investment. On July 31, 2012, P Chidambaram took

over as the Union FM.

On October 25, 2012, the EC met with P Chidambaram to discuss their concerns regarding the

GST. The EC argued for (i) restoration of CST pending further compensation after 2010-11 and

(ii) petroleum products to be kept in the exempted list. The talk ended in an impasse.

On January 2, 2013, the Fourteenth FC was constituted by Pranab Mukherjee under the

chairmanship of Y V Reddy.30

The FC was mandated to recommend fiscal policy reforms for

the period 2015-16 to 2020-21.

On January 25, 2013, the Ministry of Petroleum and Natural Resources asked the Union FM to

bring crude oil, petrol, diesel, Air Turbine Fuel (ATF) and natural gas under the GST. The 13th

FC had also recommended the same and had stated that the States could levy additional excise

tax on these items over the GST. But the FDP and PSC report had specified petroleum products

in the exempted list.

In his budget speech of 2013-14,31

P Chidambaram announced that (i) the first instalment of the

CST compensation package for the States of Rs 9000 cr would be immediately released and (ii)

the DTC would be introduced in the second half of the budget session. He also called for the

speedy implementation of the GST.

In an interaction with ASSOCHAM on March 22, 2013,32

Parthasarathi Shome, Advisor to the

Union FM, mentioned that the EC was examining the structural and administrative reforms

28

http://www.thehindu.com/news/national/pranab-takes-leave-pm-sees-void/article3569281.ece, accessed on February 6, 2015 29

http://www.thehindu.com/business/Economy/new-service-tax-regime-comes-into-effect-from-sunday/article3589492.ece, accessed on February 7, 2015 30

http://finmin.nic.in/14fincomm/14fcrengVol1.pdf, February 28, 2015 31

http://indiabudget.nic.in/budget2012-2013/ub2012-13/bs/bs.pdf, accessed on February 8, 2015 32

http://www.thehindu.com/business/Industry/gst-has-a-good-probability-in-tax-horizon-parthasarathi-shome/article4535047.ece, accessed on February 11, 2015

W.P. No. 2015-03-01 Page No. 13

required for the introduction of GST. He also said that GST could not be implemented unless

there was a seamless distribution of input credits, facilitating interstate trade and getting refunds

from one State to another.

At the meet on May 10, 2013, the EC decided that there would be no dichotomy between the

exemption list of the Centre and the States. The EC approved 12 out of 96 items in the State

exemption list and asked the Centre to prune their list of 243 items. The EC also asked for

increasing the threshold of exemption of dual GST of small traders from Rs 25 lakhs to Rs 1.5 cr.

The EC also asked for compensation for the States for five years from 2009-10, after the phasing

out of CST.

On May 28, 2013, the PM in an interaction with Japanese and Indian businessmen, expressed the

hope that GST would be implemented after the 2014 general elections.

On July 17, 2013, Sushil K Modi resigned as EC chairman following the split of Janata Dal (U)

and the BJP in Bihar. On July 22, 2013, Abdul Rahim Rather was elected the third chairman of

the EC.33

In an interaction with the PSC on August 9, 2013,34

the 13th

FC Chairman Vijay Kelkar

mentioned that after the implementation of the GST, (i) agricultural prices would increase by

0.61-1.18 per cent, (ii) manufacturing foods would be available at a reduced price of 1.22-2.53

per cent (iii) about 20 million high end jobs were expected to emerge in the economy and that

(iv) inflation would come down35

.

On August 7, 2013, the PSC tabled its 73rd

report in the Parliament.36

The main

recommendations of the report were that GST could be implemented only after (i) studying its

impact on State revenues and (ii) delineating the compensation for the States. The PSC report

also recommended Modified Bank Model of GST (Exhibit 8) as suggested by the 13th

FC than

the IGST suggested by the FDP.

The Finance Ministry set up the Tax Administration Reform Commission (TARC) on October

22, 2013. The mandate of the committee was to (i) prevent economic offenses, (ii) review

existing mechanism of dispute resolution, (iii) devise methods to widen the tax base, (iv)

strengthen inter agency information sharing and (v) propose methods to increase voluntary tax

compliance.

Exemption List of Goods

At the EC meet on November 23, 2013, the States rejected the GoIs proposal to include alcohol and petroleum in the GST and the power to notify declared goods.

37 The States also argued for

33

http://www.thehindu.com/news/national/gst-will-be-in-place-by-2014/article4758993.ece, accessed on

February 12, 2015 34

http://www.thehindu.com/business/Industry/agricultural-commodity-prices-to-rise-post-gst-

kelkar/article5007105.ece, accessed on February 12, 2015 35

The figures given were based on a study commissioned by the FC to study implication of GST on the economy. Refer Task Force on Goods & Services Tax (2009), pp.92-94 36

http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf

, accessed on February 12, 2015 37

Article 286(3)(a) of Constitution of India authorises Parliament to declare some goods as of special importance and to impose restrictions and conditions in regard to power of States in regard to levy, rates and other incidence of tax on such goods.

W.P. No. 2015-03-01 Page No. 14

an independent mechanism to compensate the States for their loss of revenue. The States wanted

special status for Jammu & Kashmir.

On December 19, 2013, Indian Council of Research on International Economic Relation

(ICRIER) report38

on food processing industry in India mentioned the impact of GST on non

alcoholic beverages. The report suggested that GST should treat food and non alcoholic

beverages with uniform low tax. It also mentioned that fiscal and regulatory barriers should be

removed to facilitate interstate movement of goods.

On February 3, 2014, P Chidambaram confessed that GST was unlikely to be passed in the

interim budget session. In his interim budget speech of February 17, 2014, he identified GST as

a key to augmenting State revenue and moving towards a modern tax regime.

The Indian National Congress (INC) released its election manifesto on March 27, 2014 in which

it promised to pass the GST bill within a year, if voted to power.39

Aam Aadmi Party (AAP) put

forth the idea of a tax system of simplicity, transparency and certainty without explicitly mentioning GST in the election manifesto released on April 4, 2015.

40 In its election manifesto

released on April 7, 2014, BJP mentioned that simplifying and rationalising tax policy was a priority. The BJP promised to bring on board all the States for the implementation of GST and

address their concerns.41

.

On May 26, 2014, Arun Jaitley became the Union FM following the general elections.42

He met

the EC on June 10, 2014 where he emphasised that GST was a key policy of the new GoI to

facilitate economic revival.

At the EC meet on July 3, 2014, Andhra Pradesh FM Yanamala Ramakrishnudu brought up three

concerns of the States. They were (i) the non receipt of CST compensation from the Centre since

2009-10, (ii) petroleum products, food, alcohol and tobacco to be kept out of the purview of GST

and (iii) clarity on the roles of GDSA and FC.

In his pre budget meet with the EC on July 6, 2014, Arun Jaitley discussed four issues. They

were (i) introduction of the 122nd

CAB, (ii) release of the CST compensation package, (iii)

proposal to merge service tax and Central excise duty into GST and (iv) effective Revenue

Neutral Rate (RNR).43

On the same day, Microsoft, National Association for Software and

Services Companies (NASSCOM) and Blackberry asked for clarity on GST and tax on software

licenses.

38

http://www.thehindu.com/business/Industry/gst-will-benefit-food-processing-industry-

pawar/article5478407.ece, accessed on February 12, 2015

39

http://www.thehinducentre.com/multimedia/archive/01816/Indian_National_Co_1816826a.pdf, accessed on February 17, 2015 40

http://www.aamaadmiparty.org/aap-manifesto-2014, accessed on February 17, 2015 41

http://www.bjp.org/images/pdf_2014/full_manifesto_english_07.04.2014.pdf, accessed on February 17, 2015 42

http://www.thehindu.com/news/national/gst-govt-wants-quick-consensus/article6098433.ece, accessed on

February 13, 2015 43

RNR is a taxing procedure in which the taxing authority receives the same tax amount after changing the tax rates. This is done by off setting lower tax incomes from one group with higher tax income from another

W.P. No. 2015-03-01 Page No. 15

In his Union budget speech on July 10, 2014, Arun Jaitley called for the speedy implementation

of the GST.44

In a letter to the Union FM on August 6, 2014, the Madhya Pradesh CM Shivraj Singh Chauhan

raised four concerns.45

He said that the 122nd

CAB was a departure from the division of power

between the Centre and the States as envisaged in the Constitution. He also said that timely

compensation of CST was a concern. He asked the GoI to operationalize Article 268 A that has

been inactive for the past ten years. He also hoped that the GST Council was a recommendatory

body.

On November 17, 2014, the GoI agreed to include compensation to the States in the 122nd

CAB.

Arun Jaitley floated a draft Cabinet note on the 122nd

CAB for inter ministerial consideration.46

It

was decided that further discussion was required to determine (i) RNR for GST and (ii) threshold

limit for imposing GST on small traders.

On December 1, 2014, the Finance Ministry came out with a roadmap for GST

implementation.47

It was decided that the 122nd

CAB would be tabled in the winter session of the

Parliament. The operationalization of the GST was decided to be from April 1, 2016.

The 14th

FC was commissioned to look into indirect taxation issues. The subcommittees attached

to the Finance Ministry looked into the RNR and suggested a rate of 27 per cent.

At the EC meet on December 11, 2014, the States rejected the 122nd

CAB. The States welcomed

the GoIs announcement to release the CST compensation of Rs 11,000 cr and asked the compensation clause to be included in the 122

nd CAB. They also argued for petroleum products,

stamp duties and alcohol to be kept on the exemption list.

On December 13, 2014, Arun Jaitley met with the EC to resolve the contentious issues.

Maharashtra FM asked the service tax coming from Mumbai to be kept out of GST. Gujarat had

apprehensions about the compensation package. The meet ended inconclusively.

On December 15, 2014, the Fourteenth FC submitted its report to the President on its

recommendations on various issues including GST.

In a meet with EC again on December 17, 2014, to resolve the impasse, the following proposals

were put forth by Arun Jaitley. On the compensation package, GoI agreed to pay compensation

to the States for five years beginning from 2009-10. This payment was to be made in three

phases. On keeping the petroleum products out of GST, GoI rejected the States demand and decided to keep it within GST with nil rate. GoI also agreed to keep alcohol out of GST.

On December 18, 2014, the Union Cabinet gave its approval to the 122nd

CAB on GST.48

The

bill envisaged (i) all indirect taxes to be subsumed under the GST, (ii) all petroleum products and

44

http://indiabudget.nic.in/FM_Speech_Delhi_Budget_2014_2015.pdf , accessed on February 14, 2015 45

http://www.thehindu.com/news/national/madhya-pradesh-chief-minister-shivraj-singh-chouhan-fires-salvo-on-

gst/article6285079.ece, accessed on February 14, 2015 46

http://www.thehindu.com/news/national/jaitley-mulling-to-introduce-gst-bill-in-winter-

session/article6651331.ece, accessed on February 13, 2015 47

http://www.thehindu.com/business/Economy/gst-compensation-to-be-included-in-constitutional-

bill/article6608322.ece, accessed on December 13, 2015

W.P. No. 2015-03-01 Page No. 16

real estate transactions to be brought under the GST and (iii) the compensation clause for CST

for the first five transitional years to be included in the draft bill.

On December 19, 2014, Arun Jaitley told the Rajya Sabha that the 122nd

CAB would be taken up

in the next session of the Parliament. On December 20, 2014, the EC raised concern that the draft

bill was not discussed by the States before the Cabinet cleared the bill (Exhibit 9). The EC

agreed to extend its support if the States were adequately compensated.

48

http://www.thehindu.com/business/Industry/cabinet-nod-for-amended-bill/article6701784.ece, accessed on

February 13, 2015

W.P. No. 2015-03-01 Page No. 17

Exhibit 1

The Evolving Tax Structure towards GST

Table 1

Tax before VAT

Levied by Type Name

Centre Direct Personal Income

Corporate Income

Capital Gains

Fringe Benefit

Securities Transaction

Banking Cash Transaction

Indirect Service

Customs Duty

Additional Customs

Basic Excise

Special Excise

Additional Excise

National Calamity Contingent Duty

CST

Education Cess

Surcharge

State Direct Estate

Gift

Inheritance

Payroll

Self Employment

Wealth

Endowment

Indirect Flat Rate Fuel

Entertainment

Lottery, Betting, Gambling

Entry

Transfer

Usage

General Sales

Additional Surcharge

Turnover

Local

Government

Octroi or Entry Tax49

Utilities (electricity, water and drainage)

Property

49

http://business.mapsofindia.com/india-tax/system.html, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 18

Table 2

Taxes Subsumed under VAT and GST

GST

CENVAT

State VAT

Service

CST

Entertainment

Lottery, Betting, Gambling

Entry (State)

Octroi

Utilities

Surcharge Source: ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf, accessed on February 16, 2015

50

https://www.welingkaronline.org/DLP/FINANCE%20-%20CENVAT%20AND%20ITS%20IMPLICATIONS.pdf, accessed on February 17, 2005 51

http://www.archive.india.gov.in/citizen/taxes.php?id=5, accessed on February 17, 2015

VAT

(CENVAT)50

(Subsume the Following of the Central Tax)

(State VAT)51

(Subsume the Following of the State Tax)

Basic Excise

Special Excise

Additional Excise

National Calamity Contingent Duty

Education Cess

Usage

General Sales

Additional Surcharge

Turnover

W.P. No. 2015-03-01 Page No. 19

Exhibit 2

EC Mandate and Constitution

Mandate of the EC

The objective of the EC when it was formed was (i) to monitor the implementation of uniform

floor rates of sales tax in the States and UTs, (ii) to monitor the sales tax based incentive

schemes in the States, (iii) to decide the milestones and methods of States to switch over to VAT

and (iv) to monitor the reforms in Central Sales Tax (CST). 52

In the year 2007-08, the mandate of the EC was expanded. In addition to the above objectives,

the EC was mandated to work with the Central government to prepare a roadmap for

introducing GST in country wef April 1, 2010, and to deal with all related matters.53

Constitution of the EC

The EC was formed on July 7, 2000, by the GoI. The founding members of the EC were the nine

State FMs of West Bengal, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Uttar Pradesh,

Delhi, Gujarat and Meghalaya. On August 12, 2004, the EC was reconstituted with the State

FMs or Taxation Ministers of all the States and Union Territories (UT) as its members. On

August 17, 2004, it was decided that EC would be registered as a Society under the Societies

Registration Act (XXI of 1860).54

Two additional members of the bureaucracy, Additional

Secretary (Revenue), GoI and Member Secretary, EC, were then added to the EC.

On December 12, 2006, further reconstitution of the EC was considered at the annual general

meeting. As per the bye laws of the Society, three resolutions were adopted. The first resolution

was that the existing structure of the EC with all the State FMs, Additional Secretary (Revenue)

and Member Secretary was reconstituted for a period of three years from 2006. It was also

decided that if the CM of a State or UT who is also the FM of the State, could nominate another

member who is a minister or a political representative in the rank of a minister, to the EC. This

nominated member may be from any political party. The third resolution was to implement the

first two resolutions by changing the Rules of the EC. The Member Secretary was empowered to

make changes to the Rules.

52

http://www.empcom.gov.in/WriteReadData/UserFiles/file/Annual%20Report/Annual_Report_2007_2008_en.pdf, accessed on February 9, 2015 53

Ibid., pp.23 54

http://www.empcom.gov.in/WriteReadData/UserFiles/file/Annual%20Report/Aunual%20Report%202006-2007_Eng.pdf, accessed on February 9, 2015

W.P. No. 2015-03-01 Page No. 20

The EC Secretariat

The EC Secretariat had the Member Secretary, EC as the highest ranking official. The Member

Secretary was to be a retired senior level bureaucrat. There was also an Advisor to EC, who was

a former bureaucrat. Officer on special duty was usually selected from the senior level

bureaucracy in the sales tax department of any member State. There were also two officers in the

role of a Senior Administrative Officer and Principal Private Secretary in the Secretariat. In

addition, there was a part time finance and an assistant finance officer. All the officers were

designated as members on an annual basis and their tenure extension was considered at the

annual meeting of the EC.

Consultative Committee

On December 6, 2004, a consultative committee was formed for discussing issues at the national

and State level, related to the implementation of VAT. Apart from the Chairman and member

secretary of the EC, the committee had representatives from the Confederation of Indian

Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), The

Associated Chambers of Commerce of India (ASSOCHAM), Conferederation of All India

Traders, Federation of All India Traders Association and Bharatiya Udyog Vyapar Mandal

(BUVM).

W.P. No. 2015-03-01 Page No. 21

Exhibit 3

Taxation Structure in India before VAT

Taxes in India are classified as Direct and Indirect taxes. A tax that is paid directly by an

individual or organization to the imposing entity is called a direct tax.55

Direct taxes are those in

which the impact and incidence of tax are on the same agent. A tax that is shifted from one agent

to the other till the last agent incurs the tax burden is an indirect tax. Indirect taxes are those in

which the impact and incidence of the tax are on different agents.

Before the introduction of VAT on April 1, 2005, tax collection in India was divided between the

Central, State and Local governments.

Schedule VII of the Constitution states the tax structure in India that was divided between the

three tiers of government.

Table 1

Direct Tax

Levied by Name

Centre Income other than agricultural income

Corporate

State Land Revenue

Agricultural income

Land and buildings

Capital value of an asset except agricultural land

Succession and estate duties on agricultural lands

Vehicles, animals and boats

Profession, trade, calling and employment

Centre and Appropriated by the States Estate and succession duties other than on agricultural land

Source: http://nacen.gov.in/inspire/uploads/downloads/53ce2a715edb1.pdf, accessed on February 16, 2015

55

http://www.investopedia.com/terms/d/directtax.asp, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 22

Table 2

Indirect Tax

Levied by Name

Centre Customs Duty

Sale or purchase of goods in interstate trade

State Sale and purchase of goods, except newspapers

Excise on alcohol and narcotics

Entry of goods into a local area

Consumption and sale of electricity

Mineral rights (subject to limitations imposed by the Parliament)

Stamp duty except on financial documents

Goods and passengers carried by inland waterways

Levied by the Centre, Collected and

Appropriated by the States Excise Duty except on alcohol and

narcotics not contained in medical or

toilet preparation

Rates of stamp duties on financial documents

Levied and Collected by the Centre,

Appropriated by the States Railway freight and fares

Goods or passengers carried by rail or air

Tax other than stamp duties on transactions in stock exchanges and

futures markets

Sale and purchase of newspaper or advertisements therein

Source: http://nacen.gov.in/inspire/uploads/downloads/53ce2a715edb1.pdf, accessed on February 16, 2015

W.P. No. 2015-03-01 Page No. 23

Exhibit 4

Tax to GDP Ratio and Indirect Taxes

The ratio of total government tax collection to a countrys Gross domestic Product (GDP) is

called the tax to GDP ratio.56

Tax to GDP ratio over the years indicates, how much tax collection

as a percentage of GDP has gone up, for a given country. When tax collected grows slower than

the GDP, the ratio drops.

Trends in Tax to GDP Ratio since 1971

As per estimates, for a developing country, tax to GDP ratio must be in the ratio of 18 per cent,

in order to ensure economic growth. For a developed country, the ratio is in the range of 70 per

cent. At 16.49 per cent, India had one of the lowest tax to GDP ratio and third lowest tax base

among the G20 countries in 2013. The tax to GDP ratio for direct and indirect taxes stood at 5.97

and 10.52 respectively.

Table 1

Tax to GDP Ratio from 1950-51 to 2013-14

Tax 1950-

51

1960-

61

1970-

71

1980-

81

1990-

91

2000-

01

2005-

06

2010-

11

2013-

14

Direct Tax

to GDP

Ratio

2.22 2.24 2.12 2.18 2.09 3.31 4.54 5.78 5.97

Indirect

Tax to GDP

Ratio

3.81 4.86 7.04 9.22 11.09 9.23 9.98 9.35 10.52

Total Tax

to GDP

Ratio

6.03 7.10 9.16 11.40 13.18 12.54 15.52 15.13 16.49

Source: Public Finance Statistics 2013-1457

Indias tax to GDP ratio can be analysed before and after the 1991 comprehensive tax reforms.

Till 1980s, we an observe a steady increase in Tax to GDP ratios due to two important reasons.

There was a steady growth rate of the economy and quantitative restrictions were progressively

56

http://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp, accessed on February 10, 2015 57

http://finmin.nic.in/reports/IPFStat201314.pdf, accessed on February 10, 2015

W.P. No. 2015-03-01 Page No. 24

substituted by tariffs in the beginning of the 1980s through the first attempts at economic

liberalization. For instance, tax to GDP ratio increased from 11.40 percent in 1970-71 to 13.4

percent in 1991 (Table 1). There was a severe drought in 1987 followed by economic stagflation.

This was succeeded by economic crisis of 1991 that led to a drop in the tariff collection and a

declining tax to GDP ratio of 14.4 in 1996.58

In terms of tax composition, the proportion of direct taxes has been decreasing from 21 percent

in 1970-71 to 14 percent in 1990-91. After the economic reforms, the share of direct taxes has

grown steadily to 24 per cent in 1997-98. This was due to an increase in both increase in income

and corporate tax. However, it is not clear how much of the increase is due to the increase in the

pay omission wages and how much of the increase is attributable to better tax compliance.59

The fastest growth rate of any tax category during the period was for customs that steadily

increased from 11 per cent in 1970-71 to 23 per cent in 1990-91. After the introduction of import

duties in 1992, the revenue from customs fell due to reduction in tariff rates as part of Structural

Adjustment Program (SAP).60

The decline in tax to GDP ratio after the reforms is hence attributable to the decline in the yield

of indirect taxes. One reason for the lower revenue from indirect taxes was the reduction of tariff

rates that was drastically high before the reforms. This was not offset by calibrating the excise

duties. Therefore, both tariffs and excise duties showed a decline of 2.6 and seven percentage

points respectively.

The tax to GDP ratio of the Centre and States during the period can be compared. The decline in

the ratio for Centre has been faster than the States due to the reduction of tariffs.

58

http://www.unescap.org/sites/default/files/apdj-7-2-3-rao.pdf, accessed on February 10, 2015 59

Ibid., pp. 71. 60

Structural Adjustment Programs (SAPs) are economic policies for developing countries that have been promoted by the World Bank and International Monetary Fund (IMF) since the early 1980s by the provision of conditional loans.

W.P. No. 2015-03-01 Page No. 25

Exhibit 5

Mandate and Key Recommendations of TAGUP

Constitution and Mandate

TAGUP was a seven member GoI advisory group set up by the FM on June 8, 2010. The

mandate of TAGUP61

was to look into technology part of five large financial sector projects. It

was headed by Nandan Nilekani. The other members were

i. C. B. Bhave - Former SEBI chairman

ii. R. Chandrasekhar - IT Secretary

iii. Nachiket Mor - Board Member RBI

iv. Dhirendra Swarup

v. S. S. Khan

vi. P. R. V. Ramanan

The committee was mandated to make recommendations on the roadmap to roll out the

following five financial projects

Tax Information Network (TIN)

New Pension Scheme (NPS)

National Treasury Management Agency (NTMA)

Expenditure Information Network (EIN)

Goods and Services Tax (GST).

Key Recommendations

TAGUP submitted its report on February 5, 2011. It had two key recommendations.62

The TAGUP has suggested that for complex IT-intensive projects, NIUs working in the spirit of

partnership with the government be put in place to handle all aspects of IT systems. NIUs should

be financially independent and empowered to take quick and efficient business decisions

pertaining to attracting and retaining talent, procurement, rapid response to business exigencies

and adopting new technologies, among other things.

The report also mentioned that, every project should have a dedicated Mission Leader within the government with a Mission Execution Team. The team should be manned by personnel, who

possess a diverse set of skills, including intimate familiarity with the government processes,

specialisation in verticals such as technology, outreach, law, as well as the ability to manage a

large decentralised organisation, among others. The group also recommends certain monetary

and non-monetary incentives for the team. 63

61

http://en.wikipedia.org/wiki/TAGUP, accessed on February 5, 2015 62

http://www.thehindu.com/news/national/nilekani-submits-tagup-report-to- pranab/article1156635.ece, accessed on February 5, 2015 63

Ibid.

W.P. No. 2015-03-01 Page No. 26

Exhibit 6

Main Provisions of the DTC Bill 2010

DTC 201064

sought to consolidate and amend the law relating to all direct taxes. The Act repeals

the Income Tax Act 1961 and Wealth tax Act 1957. DTC 2010 proposed the following changes.

Existing Rate of Income Tax

DTC changed the existing rates of income taxes in India. Companies and unincorporated bodies

would be taxed at 30 percent of their total income. A non profit organisation would not have to

pay tax for income below Rs 1 lakh. For income above Rs 1 lakh, they would be charged at the

rate of 15 percent of their total income. For individuals, income tax was exempted for income

below two lakh rupees. Tax rate was 10 per cent, 20 percent and 30 per cent respectively for

incomes between 2-5 lakhs, 5-10 lakhs and above ten lakhs.

Minimum Alternate Tax

The DTC proposed a minimum alternate tax on companies. The tax had to be paid in case the

normal income tax of a company was less than the tax on the book profit of a company,

applicable at 20 per cent.

Marginal Tax

The DTC had proposed a marginal tax on certain investments such as provident funds and

pension schemes at the time of redemption.

Wealth Tax

Wealth above one crore rupees would be taxed at one per cent. Wealth below one crore rupees

was exempted from the wealth tax.

Tax Deductions

The DTC allowed deductions of savings up to one lakh rupees to approved funds, five lakh

rupees to life insurance and Rs 50,000 for health insurance or education of children. Deduction

on housing loans would be up to Rs 1,50,000. There would be no limit on deductions on loans

for higher education.

64

http://www.prsindia.org/uploads/media/Direct%20Tax%20Code,%202010.%20Bill%20Summary.pdf, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 27

Capital Gains Tax

For assets on which securities transaction tax is payable, the long term capital gains (if held for

more than one year) would not apply. Short term capital gains would be computed as half of the

actual gains. For other investment assets, long term capital gains would be given indexation

benefits.

W.P. No. 2015-03-01 Page No. 28

Exhibit 7

Note on Amendment Procedure in India for CAB

Amendment to the Indian Constitution is the process of making changes to the nation's

fundamental law. The procedure of amendment in the Constitution is laid down in Part XX

(Article 368) of the Constitution of India.65

Types of CAB

There are two types of bills that seek to amend the Constitution.66

They are

i. Bills that have to be passed by Parliament by Special Majority.67 ii. Bills that have to be passed by Special Majority and also to be ratified by not less than

one-half of the State Legislatures.

(i) By Special Majority

The procedure for such bills is prescribed under Article 368 (2) of the Constitution. These can be introduced in either House of Parliament. Such bills can never be treated as Money Bills or

Financial Bills. No recommendation of the President is needed for introducing these bills. These

bills have to be passed by a majority of the total membership of that House and by a majority of not less than two-thirds of the members of that House present and voting.

(ii) By Special Majority and Ratification

This comprises of Constitutional Amendment Bills which seek to make any change in articles

relating to the following.

a. The Election of the President.

b. The extent of the Executive Power of the Union and the States.

c. The Supreme Court and the High Courts.

d. Any of the Lists in the Seventh Schedule.

e. The representation of States in Parliament.

f. The provisions of Article 368 itself.68

Consensus Building for CAB

The consensus building procedure for CAB have procedures mandated under the Rules of

Procedures and Conduct of Business in the Lok Sabha.69

The procedures for CAB is covered

under Chapter XI in sections 155-159.

65

http://en.wikipedia.org/wiki/Amendment_of_the_Constitution_of_India, accessed on February 15, 2015 66

http://www.desikanoon.co.in/2014/05/amendment-procedure-in-india.html, accessed on February 15, 2015 67

Special majority of Parliament refers to two thirds of its members present and voting 68

Ibid.

W.P. No. 2015-03-01 Page No. 29

The setting up of Parliamentary Committees including EC is under section 254 of the Rules. The

formation of PSC is mandated under section 331C of the Rules. Its functions and mandate are

given under 331E.

Under the mandate of the EC and PSC, there are provisions to present discussion papers, form

sub committees, focus groups and special advisory groups.

69

http://164.100.47.132/LssNew/rules/RULES-2010-P-FINAL_1.pdf, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 30

Exhibit 8

PSC Report Summary on 115th

CAB

The PSC report made nine suggestions about the 115th

CAB.70

1. Implementation of GST

The PSC noted that implementation of the GST should be preceded by adequate groundwork on

the experience of other countries and a credible study on the impact of the GST regime on state

revenues.

2. Compensation Mechanism

PSC recommended a well defined and permanent compensation mechanism. For this purpose, it

suggested the creation of a GST Compensation Fund under the administrative control of the GST

Council.

3. On IGST and Modified Bank Model

Under the 115th

CAB, CST was to be replaced by IGST giving exclusive rights to GoI to levy tax

on interstate trading of good and services and imports. In principle, IGST was thought of as

revenue neutral.

The PSC favoured the Modified Bank Model propose by the 13th

FC. Under this model, the GoI

and the States were to identify a nodal bank that would receive the CGST and SGST and act as a

clearing house for the tax.

4. Special Powers

PSC recommended that though the power to notify declared goods vested with GoI, the

Parliament should have the power to restrict and impose conditions on the recommendations of

the GST council regarding the same.

The PSC also recommended the addition of a subclause that enabled the Parliament to raise

additional taxes in exceptional circumstances.

PSC recommended that Jammu & Kashmir and the northeastern States should be specified under

the special status category.

Another recommendation of the PSC was that the States must be allowed to increase GST based

on a predetermined floor rate.

70

http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 31

5. GDSA

The PSC recommended that GDSA be replaced by the GST council that is empowered to settle

disputes.

6. Harmonized Tax Structure (HTS)

The PSC recommended that HTS should be the guiding principle and not the obligatory feature

of the GST.

7. IT Infrastructure

Regarding the IT infrastructure, the PSC proposed that the Centre provide the finance and

capacity building facilities in the States.

8. Monitoring

The PSC also suggested the formation of a GST evaluation committee to monitor and evaluate

the implementation of GST. The mandate was to study the immediate impact of GST on

inflation, GDP, retail price and other parameters.

9. Delegated Legislation

The PSC opined that specific concerns of the State like exemptions, threshold and rates be

included in the bye laws and rules and not in the CAB itself.

W.P. No. 2015-03-01 Page No. 32

Exhibit 9

Contentious Issues and their Resolution

Issue

Original

Proposal by

GoI

Demand of EC

Modified

Proposal by

GoI

Final version in

the 122nd

CAB

(December 19,

2014)

Status

Basis of

Claims

FC, TAGUP,

subcommittee

attached to

FM, Industry

PSC, FDP EC- FM meet

Exempted List

of Goods and

Services

All goods and

services to be

subsumed

under GST

Alcohol,

petroleum

products,

tobacco,

essential food,

stamp duties

No dichotomy

between Union

and State list

Unprocessed

food article,

education and

health services

by NGOs,

select public

services71

Alcohol,

unprocessed food

article in the

exemption list

Petroleum

products with nil

rate under GST

Education, health

services of the

NGOs

Resolved

without

consensus72

CST

Compensation

CST to be

completely

subsumed

under GST

Compensation

to be yearly

based on State

claim

CST

Compensation

for five years

since 2009-10

Compensation

mechanism to

be independent

of GoI

Compensation

on a tapering

basis73

of Rs

33,000 crores

from GoI to

the States in

three phases

from 2013-14

Compensation

clause in 122nd

CAB making it a

constitutional

provision

independent of the

GoI

Compensation for

five years from

2009-10

Resolved

Dual System of

Tax (CGST and

SGST)

Uniform

CGST and

SGST

Threshold

limit of small

traders to be

removed

CGST and

SGST to be

different

Threshold limit

to 1.5 crore

turnover from

existing Rs 25

lakh

CGST and

SGST to be

fixed based on

a floor rate and

a narrow tax

band to be

allowed

CGST and SGST

to be fixed based

on a floor rate and

a narrow tax band

to be allowed

In addition GoI to

levy IGST

Resolved

71

Public services will not include Railways, Post and Telegraph, other commercial Departments, Public Sector enterprises, banks and Insurance, health and education services 72

This category refers to those areas without unanimous consensus from the States 73

This means 100% compensation for the first three years, 75% for the fourth year and 50% for the fifth year

W.P. No. 2015-03-01 Page No. 33

Two Rate

System

Single tax rate Two tax rates

of standard rate

for goods,

moderate rate

for essential

goods, with a

special rate for

precious metals

and an

exemption list

Three tier

structure of tax

with 12 percent

for essential

for goods, 16

percent for

other goods

and 20 percent

for services

Three tier

structure of tax

with 12 percent

for essential for

goods, 16 percent

for other goods

and 20 percent for

services

Resolved

GST Council

and GDSA

Consisting of

Union FM,

State FMs and

MoS Revenue

Formed by

presidential

order

Veto for union

FM if

consensus not

reached

Dispute

settlement

referred to by

GoI or the

States

SC final appellate

authority

To be dropped

because of veto,

Presidential

order

To be

differentiated

from FC role

Without veto

for FM

Parliamentary

order

Without veto

Parliamentary

order

Recommendatory

powers on tax rate

and exemption list

Modalities of

Dispute settlement

No mention of

GDSA

Unresolved

(who

would be

the dispute

settling

/appeal

authority)

Input Credit IGST with GoI

acting as a

clearing house

for input tax

credit

Modified Bank

Model with

nodal bank

acting as a

clearing house

for input tax

credit.

IGST GoI to levy IGST Resolved

without

consensus

W.P. No. 2015-03-01 Page No. 34

Annexure 1

Indirect Taxation Reforms before GST

ITEC 197674

ITEC was formed by the GoI to review the existing structure of the indirect tax system on July

19, 1976 under the Chairmanship of LK Jha, the former governor of the RBI. ITEC submitted its

report in January 1978.

The report studied the taxes being imposed for different goods at various levels. It found major

differences in the rates and methods of taxes being imposed in several States. ITEC suggested

VAT to overcome the prevalent multiple tax rate structure. The report defined VAT as a tax to

be paid by all sellers of goods and services, other than those specifically exempted, on the basis

of value added by their respective firms.

It stated that implementation of VAT in other countries was preceded by a detailed public

debate in chambers of commerce, industry, associations and other firms; in Parliament and

educational institutions.

The report concluded that from an economic point of view, a tax system covering the addition of

value at all points of progression and trade is the best, as long as it does not generate difficulties

of cascading and distortion in relative factor prices.

On the other hand, the report also said that even though one integrated system based on VAT is

the best possible solution, India should opt for the second best solution.VAT was to be applied to

the manufacturing State (MANVAT) along with a restructured system of sales tax.

The long term objective of MANVAT would be to apply it not only at the manufacturing stage,

but extends it to cover imports, thereby freeing inputs from taxation which is the crucial principle

of VAT. The report further gave the details of how the MANVAT would be applied to the then

current taxation system.

Long Term Fiscal Policy (LTFP) 198575

LTFP was announced in the Union budget of 1985-86 by V P Singh.

The LTFP set out the broad direction and strategy for fiscal reforms, mainly taxation, to further

the objectives of growth and social justice. The policy proposed reforms in the structure of

customs and excise duties by the merging of various central excise duties into a single rate.

74

Sury, MM (2006). Taxation in India: History, Policies, Trends and Outlook, Indian Taxation, New Delhi 75

http://indiabudget.nic.in/es1985-86/6%20Fiscal%20Policy%20and%20Government%20Budget.pdf, accessed on February 16, 2015

W.P. No. 2015-03-01 Page No. 35

It stated that VAT is the solution for removing cascading of taxes, but due to the problems of

incorporating the sales tax of States into a centrally administered VAT, a modified VAT or

MODVAT should be introduced.

A system of giving proforma credit to select excisable commodities was already in place, but the

number of commodities was very less. It was suggested that all the commodities be brought

under MODVAT. Small scale industries were not to be included initially.

The recommendations of the LTFP were accepted and MODVAT was introduced on a few

commodities on March 1, 1986 with reference to specified Chapters of the Central Excise Tariff

Act, 1985.

Tax Reforms Committee (TRC) 199176

A committee of experts was constituted by the GoI through its Resolution dated August 29, 1991

to examine the direct and the indirect tax structure. It was headed by Raja J Chelliah with five

other members.

It recommended the adoption of a simple broad based domestic indirect tax system which

would cover almost all commodities except a few raw produce of agriculture and many services

with a few rates of duties.

The committee gave its view that the then excise system should be steadily converted into a VAT

at the manufacturing level. The report of the committee gave steps to transit the indirect taxes

into VAT at the Central Level. Extension of the VAT to the wholesale stage was also

recommended. The committee suggested that the sales tax could be converted to a State VAT

within the manufacturing sector.

Reforms in the 90s

Yashwant Sinha, the Union FM called a conference asking the State FMs to study the sales tax

on goods and services including CST in December 1995. In a meeting of all State CMs on

November 16, 1999 by the then Union FM, it was decided to take steps for introduction of State

level harmonized VAT.

On April 1, 2000, the three existing VAT rates on manufacture, imports and sales, further

merged into a single rate called the CENVAT. The tax base was also widened as some

exemptions were replaced by an eight per cent tax.

EC of State FMs was formed on July 17, 2000 for the smooth implementation of State level

VAT.

76

http://www.finmin.nic.in/the_ministry/dept_revenue/Executive_Summary.pdf, accessed on February 16, 2015

W.P. No. 2015-03-01 Page No. 36

Task Force on Indirect Taxes 200277

A Task Force on Indirect Taxes was formed in September 2002 under the Chairmanship of Vijay

Kelkar, Advisor to Ministry of Finance and Company Affairs. The Task Force brought out a

consultative paper in October 2002.

In its recommendations, the Task Force envisaged a constitutionally backed implementation of

VAT from April 1, 2003. The compensation for States had to be through a mutually agreed upon

additional resource mobilization and not through budgetary support. It also suggested that an

Harmonised SyatemSN of goods and services and a uniform tax rate must be in place.

77

http://www.finmin.nic.in/kelkar/report.pdf, accessed on Februray 16, 2015

W.P. No. 2015-03-01 Page No. 37

References

Books

1. Sury, M M (ed) (2006). Taxation in India 1925 to 2007: History, Policy, Trends and Outlook, Indian Tax foundation, New Delhi

Reports

2. Empowered Committee of State Finance Ministers (2009). First Discussion Paper on GST, Government of India, New Delhi

3. Report of Task Force on Implementation of FRBM Act, Government of India, New

Delhi

4. Thirteenth Finance Commission (2009). Report of Task Force on Goods & Service Tax.

Online Resources Sourced in the Text

5. ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf,

6. http://business.mapsofindia.com/india-tax/system.html

7. http://en.wikipedia.org/wiki/Amendment_of_the_Constitution_of_India

8. http://en.wikipedia.org/wiki/TAGUP

9. http://finmin.nic.in/14fincomm/14fcrengVol1.pdf

10. http://finmin.nic.in/reports/IPFStat201314.pdf

11. http://indiabudget.nic.in/budget2012-2013/ub2012-13/bs/bs.pdf

12. http://indiabudget.nic.in/es1985-86/6%20Fiscal%20Policy%20and%20Government%20Budget.pdf

13. http://indiabudget.nic.in/FM_Speech_Delhi_Budget_2014_2015.pdf

14. http://indiabudget.nic.in/ub2006-07/bs/speecha.htm

15. http://164.100.47.132/LssNew/rules/RULES-2010-P-FINAL_1.pdf,

16. http://nacen.gov.in/inspire/uploads/downloads/53ce2a715edb1.pdf

W.P. No. 2015-03-01 Page No. 38

17. http://tinxsys.com/TinxsysInternetWeb/GSTJointWorkingGroup.pdf

18. http://www.aamaadmiparty.org/aap-manifesto-2014

19. http://www.archive.india.gov.in/citizen/taxes.php?id=5

20. http://www.bjp.org/images/pdf_2014/full_manifesto_english_07.04.2014.pdf

21. http://www.caaa.in/Image/23ugsthb.pdf

22. http://www.desikanoon.co.in/2014/05/amendment-procedure-in-india.html

23. http://www.empcom.gov.in/WriteReadData/UserFiles/file/Annual%20Report/Aunual%20Report%202006-2007_Eng.pdf

24. http://www.empcom.gov.in/WriteReadData/UserFiles/file/Annual%20Report/Annual_Report_2007_2008_en.pdf,

25. http://www.empcom.gov.in/content/6_1_AboutUs.aspx

26. http://www.ficci.com/spdocument/20238/Towards-the-GST-Approach-Paper-Apri-2013.pdf

27. http://www.finmin.nic.in/kelkar/report.pdf

28. http://www.finmin.nic.in/the_ministry/dept_revenue/Executive_Summary.pdf

29. http://www.investopedia.com/terms/d/directtax.asp

30. http://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp

31. http://www.jsalaw.com/Admin/uplodedfiles/PublicationFiles/Budget%20news%20letter.pdf

32. http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf

33. http://www.prsindia.org/uploads/media/Direct%20Tax%20C